Parents can be at risk when filling a federal student aid gap

Parents who take out loans to help their children pay growing student tuitions may end up in financial straits themselves, with debts growing quickly with each student.

If parents don't plan for college expenses, they can face decreased disposable income and having to skimp on retirement savings in order to pay home mortgages and student loan debts, financial experts said.

'As parents pay for their house and pay, or help pay, for their kid's college, if they sign loans for one or two or however many kids, it could delay their retirement,” said Carol Jensen, author of 'College Financial Aid: Highlighting the Small Print of Student Loans.”

Families often turn to private loans that parents cosign or to federal parent PLUS loans taken out in a parent's name when grants, scholarships and federal student loans aren't enough to cover college costs.

'Parents are the only ones left to pick up the tab. I don't know if parents realize that their role is going to be, or is leaning toward being, a bigger piece of the pie,” Jensen said.

Jensen, of West Union, said she has had a front row see to see 'how the system works and how it can work.” She helped her three children through school, teaches at local colleges and is vice president at Luana Savings Bank.

In researching for the book, she interviewed financial aid counselors from colleges in 12 mid-western states.

When comparing private loans and the federal parent PLUS loans, Jensen said the PLUS loans are generally easier to get. Borrowers don't have to prove income, employment or the ability to pay back the loan, which can be taken out for the full cost of attendance minus other aid.

However, the borrowing parent must have a clean credit history.

Sara Harrington, assistant director of student financial aid at the University of Iowa, said roughly 40 to 45 percent of parents with University of Iowa students request PLUS loans. But Parent PLUS loan debts don't turn up on reports of a graduating class' average or total debt.

The Federal government released national Parent PLUS Loan default rates for the first time in March, which showed the rate has tripled in recent years reaching 5.1 percent for borrowers that entered repayment in fiscal year 2010.

The PLUS loans have variable interest rates, which means they fluctuate over time, and can reach up to 10.5 percent. Because the loans are in parents' names and cannot be transferred to the student, it is the parent - not the student - who faces repercussions if the loans go into default.

Parents, who opt to cosign a private loan with their student or who take out a private loan in their own name, can sometimes get better rates if they are creditworthy or willing to put up their homes collateral. But finding those loans can be difficult.

'One counselor said that understanding all the options for private loans is as difficult as trying to decipher cellphone plans. I think that's a good analogy,” Jensen said.

College financial aid offices are often limited to talking about federal programs and can't offer advice on private loans, meaning families that choose to pursue private loans are left to navigate the system on their own.

'It's a struggle for the counselors. It's a struggle for the students. It's a struggle for the parents to understand that they will not get help from the financial aid office. They don't know where to go, what to do and really they are on their own,” Jensen said.

Harrington, of the UI Office of Financial Aid, said the office helps with federal loans, but tells families to search online for private lenders and check with state student assistance agencies to see if their state has a loan program.

'We'll tell parents, ‘Here's the bare minimum your family needs to pay and here's the maximum you can get from these sources.' We will give them some information and help them calculate what monthly payments would be, but we don't advise parents as heavily as students,” Harrington said.

She said parents willing to take out loans 'take a lot of the burden off students.”

'Twenty or 30 years ago, people could go to school by working full time over the summer, but that's not true anymore. The Pell Grants haven't kept up with costs, federal student loans haven't kept up. There's a gap and some families are finding that students alone can't cover that gap,” she said.

However, parents who are taking out loans to help their children pay for college need to keep in mind long-term costs, especially if they plan on helping more than one student through school, said Erick Danielson, supervisor of the Iowa College Access Network, which aids parents and students plan for college and navigate financial aid.

'Salary-wise, parents might be able to help pay, but parents need to know that if they have a second student in the family, are they going to be able to afford taking out $50,000 for this student and then another $50,000 for the next student,” he said.

l This story was produced by Iowa Center for Public Affairs Journalism-IowaWatch.org, a non-profit, online news website that collaborates with Iowa news organizations to produce explanatory and investigative reporting.