America's snowflake millennials aren't used to being told 'no', especially by their parents. Perhaps that's why, as we pointed out a few days ago, more millennials than ever are now living at home with mom and roughly one quarter of them don't even both to enroll in classes and/or find a job (see "A Quarter Of Millennials Living At Home Neither Work Nor Study"). But, when it comes to racking up massive student loans for their lazy, millennial, snowflakes, we suspect a healthy portion of about 3.5 million Baby Boomers are wishing they had a do-over to do just that.
Unfortunately, rather than making some difficult decisions about affordability and/or forcing their kids to pay for their own education, Baby Boomers have incurred nearly $100 billion in student loans so that little Johnny and/or Susie could get that Anthro degree they always wanted.
In fact, as the Wall Street Journal notes today, so-called "Parent Plus Loans" have soared over the past 15 years as parents have increasingly found it impossible to cover college tuition costs.
Parent Plus, created by Congress in 1980, allows parents to borrow to cover tuition and living expenses—often after their children borrow the maximum in undergraduate federal loans, capped by law at $5,500 a year for freshmen, $6,500 for sophomores and $7,500 for juniors and seniors. There is no limit to how much parents can borrow. Supporters say the program ensures students can go to schools of their choice.
When it comes to federally subsidized student loans the underwriting standards put even the no-income, no-doc mortgages of 2005 to shame. Just take the case of Sherry McPherson as an example. Per the WSJ, McPherson was able to secure $100,000 in student loans for her son and herself to attend a trade school despite "her shaky credit and unemployment." Adding insult to injury, for taxpayers at least, McPherson has already refinanced her loans into one of Obama's "income-driven plans" which "sets her payments at zero while she is unemployed."
Sherry McPherson took out Parent Plus debt in 2006 so her son could enroll in a seven-month certificate program at a Seattle for-profit school that teaches commercial diving. She was an unemployed single mother with thousands of dollars in credit-card debt, a car loan and a subprime credit score. She had just retired from the Army after suffering an injury in Iraq.
The school, the Divers Institute of Technology, told Ms. McPherson she needed to borrow nearly $16,000 to cover remaining tuition after her son maxed out on undergraduate federal loans, she recalls.
Ms. McPherson, now 50, remembers telling the school’s financial-aid administrator she wouldn’t be approved because of her shaky credit and unemployment.
“She looked at me and said, ‘Look, all we need is your Social Security number,’ ” recalls Ms. McPherson. “They approved me in three minutes.”
She hasn’t worked since, partly because she attended college and graduate school herself. Her Parent Plus balance has more than doubled. Combined with her own student loans, she now owes more than $100,000 to the federal government.
Ms. McPherson has refinanced into an income-driven plan, which sets her payments at zero while she is unemployed.
And while it may sound outrageous, McPherson's story is hardly an anomaly with over 40% of student loans originated in 2009 - 2013 going to subprime borrowers, more than double the subprime mix of the mortgage market in 2005.
Now, just as these parents are entering their retirement years, a record number of them are having their Social Security and pension payments garnished to pay for student loans that they never had a prayer of being able to afford. In fact, as of September 2015, more than 330,000 people, or 11% of borrowers, had gone at least a year without making a payment on a Parent Plus loan and over 40,000 of them were having their income garnished by the federal government.
The number of Americans who had wages, tax refunds or Social Security checks reduced because of unpaid student debt increased 71% between September 2010 and September 2015, according to the GAO. About 41,000 Parent Plus borrowers were among one million student-loan recipients who had checks garnished in the 2015 fiscal year. The government garnished the Social Security checks of 173,000 borrowers from student-loan programs in 2015, up from 36,000 in 2002.
Of course, it's not just parents that are defaulting on student loans. Roughly eight million Americans owing $137 billion are at least 360 days delinquent on federal student loans, nearly the number of homeowners who lost their homes because of the housing crisis.
Meanwhile, the Obama administration recognized that the Parent Plus loan program was saddling 1,000s of people with loans they could never repay back in 2011 and took steps to curb lending to "high-risk" individuals. Then, Cheryl Smith of the United Negro College Fund apparently reminded Obama that making financial decisions based purely on financial metrics is racist, so he promptly reversed his own rules.
The program checks only a borrower’s past five years of credit for major blemishes such as bankruptcy or foreclosure, and the past two years for delinquency on debts of more than $2,085. Consumer counselors are hearing from borrowers who make as little as minimum wage but borrowed tens of thousands of dollars and now can’t repay.
Obama administration officials, worried Parent Plus was heaping debt on high-risk borrowers, put in place tighter restrictions in 2011. But after schools argued stiffer underwriting would prevent many students from covering tuition, thus reducing college access for minorities and poor students, the administration rolled back the new rules.
“Without this program, our fear is that many of these families would be getting private loans at less-favorable terms or less-favorable repayment options,” or they wouldn’t be able to cover tuition at all, says Cheryl Smith, head of government affairs for the United Negro College Fund.
Of course, we suspect the Obama administration decided it was better to seek taxpayer forgiveness than permission as James Kvaal, Obama's top education advisor and a man who undoubtedly was part of the decision to loosen lending standards admits: “At some point, we’re going to have to realize that a bunch of loans that have been made are not going to be repaid."