The Newest “Student Loan”

March 29, 2016 at 9:41 am Leave a comment

This is the time of year I get nervous about how I am going to finance college for my 13 year old. I talk to friends struggling to figure out how they are going to fund their kid’s college without putting a pound of flesh on the line and I keep on thinking there just has to be a better way.  Spiraling debt + spiraling tuition is a recipe for disaster, which is already putting a drag on the economy and making an increasing number of people question the value of an education.  This will result in a further drag on the economy and damage the quality of our democracy.  After all, this country is predicated on the assumption that people are smart enough to govern themselves.

So whenever I see an article like the one in this morning’s WSJ titled “Squeeze the Parents: New Student Loan Goes Straight to Mom and Dad,” I’m inclined to read it and wonder why the country with the most creative financial geniuses in the world and a political culture that recognizes the importance of education to a free society can’t come up with better solutions for financing higher education.

According to the article, more and more lenders are coming out with private loans offered directly to parents. The advantage for parents is that a least their kids don’t end up with the debt that comes from paying off tuition and fees that average more than $31,000 per year at private universities and can easily cost more than $50,000 per year.  It also avoids taking out the HELOC just to pay for college.

The advantages for lenders are also obvious. First, it represents a real potential growth market. These are private student loans that anyone can offer and whose size isn’t restricted to the amount of money students need to pay for gaps in their traditional student loans.  Plus student loans are risky.  You’re giving a loan to someone who may or may not have the means to pay it back in four years and may end up moving across the country.  Parents are a much safer bet, which is why so many are already cosigning loans with their kids.

So, is this a market worth exploring? If I was a lender, the answer would be yes.  The student loan market has grown to a whopping $1.23 trillion.  These loans provide one more option for your members trying to help their child enter adulthood without being weighed down by high interest debt.  Besides, you have already been making these loans indirectly for years in the form of HELOCS.

But The Blogger in me says there has to be a better way. Elite institutions like Stanford, Boston College and Carnegie Mellon frankly admit that they are pushing lenders to offer these loans.  Of course they are.  They help parents justify putting themselves in more debt for the sake of their children and they have the added benefit of hiding the true cost of a college education since these loans are not classified as “student debt.”

Perhaps these colleges should begin to ask what they can do to avoid the never-ending tuition increases that border on legal extortion: pay this tuition and put off your retirement plans.  They are implicitly telling parents or save some money and hope that your kid succeeds in an increasingly competitive economy where they are competing for jobs not only against their peers in America but the best and the brightest from China and India.

Come to think of it, I better get that checkbook ready. Here is the article:

http://www.wsj.com/articles/squeeze-the-parents-new-student-loan-goes-straight-to-mom-and-dad-1459205216

 

 

 

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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