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When parents pay for college, student debt becomes a family affair

Valerie Shippen thought she was being frugal when she agreed to pay for only one year of college tuition for each of her four children.
The 49-year-old Ipswich, Mass., schoolteacher and her husband, Peter, an electrical engineer, both went to college and graduate school. They wanted to do whatever they could to give their children the same opportunities.
They assumed they would get help from financial aid, but like many middle-class households, their bids for federal financial aid were denied. It didn’t matter that three of their four children were in college at the same time — on paper, they looked better off than most, though their reality was far different.
“All three kids were in college all at the same time and we didn’t have cash saved up,” Shippen says. “We had to finance everything.”
SInce each of their three kids decided to attend private universities, their financing options were limited. They could have taken out private loans, which would have meant higher interest rates and fewer flexible repayment options. But when they found out the schools participated in the federal direct loan program, they opted to take go with Parent PLUS loans instead. They borrowed just enough to see their kids through their undergraduate degrees, with the understanding that each would pay off 75% of their loan balance after graduating. (Parent PLUS loans allow parents to take out student loans under their name on behalf of dependent undergraduates).
With all three kids attending private universities, their collective student debt bill quickly grew to more than $500,000. Two of their children have managed to pay off their debt since graduating, but the couple is still strapped with more than $150,000 worth of loans and will add more to their load when their youngest son graduates next year (though, thankfully, he went to a public school).
“It has just killed us,” Shippen says. “We have no retirement savings. We’re on a 25-year repayment plan and still paying $1,700 a month. It’s like having another mortgage payment.”
Although their loans are federal and they have the option to apply for an income-based repayment plan, the Shippens were told their combined income was too high to qualify.  
Their story is extreme but not altogether uncommon.
As much as parents want to give their kids a leg up in college, the reality is that college costs have increased by nearly 30% over the last five years alone. This has happened in tandem with the Great Recession, which many families are still recovering from.
And when their savings are tapped and there’s nowhere else to turn to put their kids through school, parents can be just as likely to use loans to make up the difference. Since the recession, student loans have become the fastest growing household debt in the U.S..
Nearly 30% of the 38 million federal student loan borrowers in the U.S. today are between 40 and 59 years old. There’s no data that details exactly how many of these older borrowers are parents looking to help out their children, like the Shippens, but it’s safe to assume they aren’t all simply late college bloomers. It's easier to estimate the number of parents who are tied up in private loans, however. Nearly 90 percent of all private student loans require at least one relative to cosign.
When parents and other relatives cosign a student loan, they are held equally accountable for making payments on time. If the student can’t make their payments on time, cosigners have to pick up the slack. And they get burned just as badly by defaulted loans, which can wreck their credit score and make it difficult to qualify for new loans — not to mention the hassle of dealing with incessant phone calls from lenders. For parents who take on Parent PLUS loans, like the Shippens, the loans are entirely in their name, which means they’re the only ones who will take the hit for late payments.
“I think a lot of parents work under the misunderstanding that they can get a lot of aid from schools and that it will be free money,” says Mary Anne Busse, a consultant who works with 529 plan administrators. “The reality is that it is most often not free money and a lot of financial aid packages come in the form of loans.”
On the hook long after graduation
The burden of college cost-sharing can extend far beyond a student’s graduation date, as well.  Though the economy is recovering, unemployment is still in the double digits for 20- to 24-year-olds, and for recent graduates who have managed to find jobs, nearly half are considered to be underemployed. Cash-strapped and with tens of thousands of dollars in loans to contend with, home is often the first place graduates go for assistance.
In a survey to be released Tuesday by Upromise by Sallie Mae, nearly 85% of parents say they expect to bankroll their children well after graduation, either by letting them move back home or helping them pay for a place of their own.  Half of parents say they would help out their kids for up to five years, while one-third say they would cut them off after six months.
For the Shippens, paying down their debt has been a family affair. So far, two of Shippen’s children have had to move back home at some point to help pay off their loans. Her youngest daughter, Channing, graduated with a degree in music therapy from a private university in 2013 and now works as a music therapist at a nonprofit helping the elderly.  She worked three part-time jobs while in school to try to get ahead of her debt, but eventually had to scale back in order to dedicate more time to her studies.
She's working full-time in music therapy at a nonprofit now and still juggles part-time work to supplement her income. In September, she will move back in with her parents so she can contribute as much money as possible toward their debt.
"All through school I did my best not to ask a penny from my parents unless I was in dire straits," Channing says. "Even when they offered help I frequently denied it, because I am too proud and independence is something that is very important to me. I worked three part time jobs and went to school full time. It was hard — very hard."
The wisest thing college hopefuls and their parents can do to keep from biting off more debt than they can chew is to adjust their expectations about college altogether, Busse says.
For parents who dreamed of putting their kids through school that may mean learning to put more of the cost burden on their children’s shoulders. For students who dream of going to private universities for a degree that may not lead to a very lucrative career, it may mean opting for an in-state school or community college instead.
“I think for a while we were in that mode where the expectation was for parents to pay for everything,” Busse says. “But we’re finding young college students today are paying a little bit more and putting a little bit more of their skin the game. Parents are asking their children to take some ownership.

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