Why are parents so reluctant to take out loans?

kluge · November 1, 2013, 2:45pm

And

This is the philosophy I was referring to. I’d say that the predominant philosophy of this site is that “a better name on a diploma” actually has value. Sure, any individual could do just as well attending Podunk Community College for two years and finishing up at Podunk State as four years at Stanford. So why not just send your kid out the door with a wave and take off for your trip to Cabo?

Because the chances are that your kid in fact won’t. That’s why we try to give our children their best chance at success, instead of simply making it possible that they can overcome odds and succeed. And speaking only for myself - I do that for me, not out of some sense of duty or obligation. I’m not interested in a status car (although working AC would be nice.) It gives me pleasure and satisfaction to provide the best opportunities for my children that I can. I could be retired today if I hadn’t spent the money to pay for my kids’ education; I’ll be working for at least another five years as it is. I’m okay with that.

Let’s be realistic: we are talking about roughly $350 a month here. (Either as payments on a loan or funds not available to withdraw and spend in retirement.) Is that going to be the difference between an comfortable retirement and dining on cat food? If it were the arguments about needing the money in retirement would be valid. But that’s not likely to be the case.

Who are the “peasants” here? What is the “sacrifice?”

Lookingforward: I was referring to Jews and Asians, both of which have a strong tradition of parental sacrifice to pay to educate their kids. And yes, both cultures also have a tradition of said kids taking care of their parents. Hmmm. I wonder why that is?

Nrdsb4 · November 1, 2013, 2:54pm

There’s a whole lot of middle ground between Podunk community college and Stanford. There are some very very good public universities which can give the student a stellar education and send them out into the world with a comparable chance of personal and professional success. It’s not borrow 80K per child or doom them to a life of futility while you take off for Cabo.

Many people send their kids to less expensive schools where they don’t have to go into extreme debt not because they don’t care or because they are selfish, but because they don’t believe that there is a very large gap (if any) between less expensive state school A and allegedly superior according to such and such magazine Pricey school B.

lookingforward · November 1, 2013, 3:03pm

OP said $350/mo if it’s a 30 year at 3%. Earlier, I looked up and quoted the 10 year repay for 80k- even at the mythical 3%, over 750/mo. The rate is actually 6.41.

Can’t say the caring for parents is necessarily because, for 4 years, they had a particular college experience. Or 7+ with grad or prof school. And now the parents are still encumbered.

The strains a hypothetical 60k family is under are not easily predicted by us. I know some costs can be discretionary- I can’t assume what they can take out for a college plan.

Also, I really wonder what, besides PP, they would qualify for.

ps. I gave my kids their “best chance at success” starting with pre-k, the various things we do over the years and the ways we “look forward” over all those years. Mine landed at a super college. But I also made it clear to D1 that any college that doesn’t offer the aid we need is not a dream school.

SlitheyTove · November 1, 2013, 3:10pm

If we’re only talking about being financially/materially better off, then I agree there’s a limit. Our material expectations for our children are that they be self-supporting and not live hand to mouth.

In other ways, my children are better off in having far more opportunities than I or the spouse had at their age. Looking at the college kid, the contacts and mentors that she has in a wide-ranging number of fields all over the world–it’s astounding to me. That just wasn’t possible when I was in college.

ucbalumnus · November 1, 2013, 3:56pm

The parents who are facing the question of huge debt are the ones who couldn’t afford to save up beforehand (where compound interest works for them instead of against them). Is it realistic to expect them to come up with the extra money for debt service when their kid enters college? Is it realistic to expect them to even qualify for that large an unsecured loan, since they may already be maxed out in debt capacity?

Social scorn and guilt-tripping (from sources other than the student) may or may not be appropriate, but it won’t solve the student’s college financing problem.

mirrortothemoon · November 1, 2013, 4:25pm

OP (seems to me) is also assuming the child will have a wonderful, idealized experience at whatever university they take out loans for.

I’m here to say, not necessarily.

If anything were to happen to your child like it did to me (not a parent, but a student with $100k of debt and no degree to show for it yet), your child could end up experiencing severe mental illness that at times debilitates them and came out of nowhere (except maybe through the demands of such a program); where’s your heartwarming, life affirming experience of an education, then? What if something unforeseen happens to the student and they have to leave school? Then how will you feel about having spent so much towards something you’ll have nothing to show for?

Things don’t always go to plan. Not only financially for the parent (with unforeseen car expenses and medical bills that many posters have pointed out), but subjectively for both parties, as well.

Sure, a pricey education may seem so important to such a hypothetical parent right now; but even 10 years down the line, when you’re faced with that “small” monthly payment, will you really see the value in it anymore? By then, the student will surely have made their own path in whatever job they have, and their experience in college will be just something they look back on, with memories fading. Or perhaps they’re like me, and see how much their life has actually been limited, rather than opened up, by that initial glimmer of a top, pricey, UNaffordable school, all because things didn’t go perfectly to plan. Will you really say to yourself, every time you sign that check “wow, that four years was SO definitely worth it!”? In your situation, the child could be struggling, and to say the least, it would be a real bummer to pay that money every month into a never ending pit.

Hah, happy post, I know, but things happen.

Education isn’t the be all and end all of having a good life. It can be the start of one, sure, but it doesn’t need to cost $80,000; not at all. It’s only 4 (undergrad) years of someone’s life. What your values are now, when you sign those loan papers, might change due to some life-altering event such that I experienced. Similar things have happened to other peers in my life, who are also now all stuck with insurmountable debt. Or, their parents are.

That amount of debt it a lot. Seriously, I’m only posting because I’ve decided maybe if I start spreading my story around, someone won’t make the same mistake I (and those close to me who didn’t know any better) did, by supporting someone taking out massive loans, whether it be the parent or student. I’m now on my feet towards a better future with an excellent GPA in nursing school with not much more debt to do so, but I got lucky. If I could take back everything I did by taking out all that money when I was 18, you better believe I would, in a heartbeat. (Not that I won’t work my butt of to pay it off as responsibly and quickly as possible, and live a saver lifestyle in favor of my and my childrens’ futures.)

I’m with the vast majority here. There are too many unaccounted for circumstances, too much subjectivity, and too much room for debt that large to completely ruin your life and change how you conceptualize everything in life to just so seemingly easily decide to sign loan papers on one day.

sigh if it isn’t obvious, I’m very thankful for all the wise parents in this thread. You’re spot on in your assessments. Wish I had listened to all of you, rather than my parents, when I was 18. Please stay vocal about your financial beliefs because it could save a lot of peoples’ futures who are reading this.

buenavista · November 1, 2013, 4:29pm

Actually, we aren’t, because despite the OP’s premise, there is no 30-year 3% student loan readily available.

Parent PLUS is more than double that rate and a 25-year maximum term.
Private loans usually max out at 15 year terms, have higher rates, and not everyone will qualify.
Home equity loans/lines of credit assume a house with good equity (for an $80,000 loan), also require qualification (good income/low debt), and even the variable rate on lines of credit is currently over 3%.

So, as others have pointed out here, we’re talking more like $500+ per month, PER CHILD, and for those of us in our 50’s, long into retirement. Which will be meager if we don’t fund retirement accounts in our our last 15 years of employment.

I’m really tired of this idea that there are so many parents taking lavish vacations and buying $100,000 cars instead of paying for college. I’m sure there are some–there’s some of everything in this world. But everyone I know works extra hours, drives older cars, takes (modest) loans, and saves wherever they can to help their kids. Within reason.

kluge · November 1, 2013, 5:13pm

So we’ve pretty well mapped out the extremes - parents with $300K incomes who elect to pay nothing at all for their kids, and parents just getting by who would be impoverished in retirement if they pay any more than they are already committed to just to move their child up the USNews rankings by 10 spots.

So what about everyone in between? The folks who would simply be more comfortable in retirement if that $80K wasn’t spent on Johnnie’s college, or who might have to defer retirement altogether for a year or two to earn the difference and have an opportunity to send Johnnie to, say, Rice instead of UMKC, or Cornell instead of SUNY? That’s obviously a tougher question. What bugs me is the drumbeat of the financial advisors who give the “conventional” advice:

Seems to me that that just makes it too easy to justify leaving your kids to twist in the wind.
UCB is right - by the time an individual kid is in a senior in high school the damage has already been done in his family, but it seems to me that a little more societal disapproval of people who don’t plan for their kids’ education couldn’t hurt. People avoid disapproval. Not all of them, but most. So telling parents that they will be perceived as not loving their kids if they’re unwilling to devote some more $$ toward their education is okay with me.

Granted, I’d rather see more first rate state universities with low tuition. But that’s apolitical issue, and we don’t discuss such things here.

ucbalumnus · November 1, 2013, 5:47pm

Again, it comes down to whether the $80,000 is in their (much larger than that) savings and investment accounts somewhere, or whether they would need to take loans for that amount. In the latter case (presumably the scenario that the OP is referring to), the parents’ spending habits are likely such that taking loans would be a financially risky proposition at that point, if they can even qualify for such loans (parents in that situation may already be at the limit of what lenders will lend them, and their retirement savings (if any) is likely far short of even baseline needs). You can socially disapprove of such parents’ spending habits all you want (and some others may well agree with you, at least in the case of those with incomes high enough to get no financial aid anywhere), but that won’t make money magically appear for their kids’ college funds.

SlitheyTove · November 1, 2013, 5:52pm

But these examples are just as much extremes as the $300k income family that doesn’t contribute anything and the poor family that goes broke moving up 10 spots in USNEWS ranking.

kluge · November 1, 2013, 6:37pm

Well, with apologies to UMKC and (unspecified) SUNY that was the scenario posited by the OP - unremarkable state school vs. top 30 private. And I don’t doubt that those scenarios have occurred.

UCBalumnus, I would expect that the most likely scenario for a family with college-aged kids and an income of $80 - $100K is a family with over $80,000 in retirement funds or illiquid investments that are unavailable for some reason - penalty for withdrawal before age 60 for example. That was the situation my family faced at the time.

I do understand that many US families have absolutely no savings, but then most US households have an income of less than $80 - 100K. $80K represents about the 70th percentile, $100K about the 80th. The median net worth of families in that income bracket is over $200K, $100K excluding home equity; I’d expect that that number would skew higher for households headed by people old enough to have college-aged kids. You can run a lot of scenarios within those parameters. But most (albeit not all) folks in that financial neighborhood have some assets.

lookingforward · November 1, 2013, 6:50pm

Can you explain this: I would expect that the most likely scenario for a family with college-aged kids and an income of $80 - $100K is a family with over $80,000 in retirement funds or illiquid investments

ucbalumnus · November 1, 2013, 6:57pm

If the parents actually have a comfortable amount of money that will certainly be available in the future, but there are temporary liquidity issues with using some of it now, then taking a loan is certainly understandable (and such parents are more likely more than willing to help the kids with college costs). But would parents in that situation really need a 30 year loan for that type of liquidity management situation?

In any case, that is an outlier situation compared to the situation where the parents just don’t have the money at all and hence are looking at large loans for that reason.

Such families would not have to borrow to come up with $80,000 (except in liquidity management situations), although that would drain their savings, which is likely woefully inadequate to begin with as far as the parents’ retirement savings goes.

You can probably come up with other outlier situations where borrowing $80,000 to help the kid’s college costs would make sense, but the common situation is the one where the parents just do not have the money to begin with, so taking on that much (probably additional) debt would be an unrealistic prospect.

hebegebe · November 1, 2013, 9:58pm

I actually think there are lots of people who make poor financial decisions, and some coaxing would do them and society some good. I have a friend who has three kids. He has the money to buy an expensive SUV to haul around his BMW that he takes to the track, but no money to help send his kids to college. On a smaller note, it still surprises me how many people roll over credit card debt, which is some of the most expensive available.

Colorado_mom · November 1, 2013, 10:23pm

“t I find it difficult to believe that a family that has had an income of $80-100K per year would have no pensions and nothing set aside in IRAs or 401(k)s.”

We have healthy 401k accounts. But both DH and I have lost opportunities for corporate pensions / retirement healthcare. Things have changed a lot since we were hired 30 years ago. Retirement planning is trickier when you can’t assume any good lifetime annuity stream , other than SS.

HImom · November 1, 2013, 10:34pm

Indeed it is tricky to figure out how to make funds last, especially when there is no pension to rely upon and SS may be smaller of non-existent.

It does surprise me when I meet people who have college degrees but see no need to be sure to fund some post HS Ed for their kids, preferably college like they were able to benefit from.

collegehelp · November 1, 2013, 10:57pm

I found out that the Parent PLUS Loans that I was thinking of in the original, hypothetical scenario have an interest rate of about 3.15% fixed rate. They were taken out beginning about 12 years ago, roughly $80K with about $50K left to pay. Payments are now about $280 per month. The family expects about $45K per year in social security and has a very sizeable retirement investment, primarily stocks, which has averaged double digit returns over several decades despite three stock market collapses. They could pay off the loan at this point but it makes more sense to leave the money in the stock market. Mother stayed home when kids were young but worked part-time once last kid was in school, father worked two jobs. They live modestly, always drove junker cars (one hit 200K miles), their small cape-cod house is in disrepair but they plan to fix it up, buy clothes at the VOA and Salvation Army sometimes, take modest vacations to state parks, gave their three kids money for down payments on homes, spoil their grandchildren rotten, travel only to see their out-of-town children, mortgage is paid off (very low housing cost region), pay for their kids plane fares. All three kids graduated from private schools, one is a stay-at-home mom and needs their financial help, the other two are researchers with advanced degrees in STEM fields but they are just starting out with young families and also need their financial help which they gladly supply. I hope this clarifies things.

Great discussion, high level of discourse, but little reference to the intangible benefits of better schools. What about the ethos of the university? Being exposed to a better work ethic, value system, social consciousness, sharper minds with stimulating ideas, moral behavior, and so on. Students absorb the culture they are in. You can’t measure that in dollars.

There is some freedom to choose your friends in college but you can’t completely avoid the undesirable element which, I suspect, is greater at lower-tier schools. The environment is such that you may be pressured to spend time with, and even bond with, students who have undesirable qualities. Think back to your own college days. Would you choose to continue friendships with most of your college acquaintances? Were they a good influence? Did their behavior represent what you wish for your child?
Did YOUR behavior?? (just kidding)

It isn’t the main reason for choosing a school, but there is “dating” and many students meet their future spouse at college. Did you? (I did not but many do. After 4 years of college and several years of grad school, I married a girl I knew in high school.) I read that 26% of Princeton women marry Princeton men, for example. College is a good opportunity to meet lots of people your own age and “mentality”. You have probably heard about the letter from a Princeton graduate whose daughter was attending Princeton. She encouraged all Princeton women to take advantage of the opportunity to meet Princeton men. It was a little arrogant but there was some truth in it, I think. The same should have been said to Princeton men. I know this is a controversial topic but, be honest, has it occurred to you? Another (secondary) reason to favor better schools.

Drugs and alcohol are big problems on campuses but that should be a different thread.

sally305 · November 1, 2013, 11:02pm

Thank you for the nice post, mirror.

sally305 · November 1, 2013, 11:05pm

collegehelp, I know already that both my kids have good (actually, great) taste in boyfriends/girlfriends. They have managed to find them at their huge, diverse public high school and I am sure they will do the same in college or after they graduate. I don’t care where their partners go to college but I am 100% confident neither of my kids will end up with deadbeats/addicts/people with no purpose in life.

thumper1 · November 1, 2013, 11:12pm

Are you saying the ONLY place to meet a suitable spouse is at an elite school? That is just plain poppycock.

And guess what…there are drugs and alcohol even on elite campuses like Princeton.

These schools do NOT have a magic halo around them. You have placed them up on a pedestal. Yes…they are good schools…but really, do you think a family should go into debt so their kid could find a spouse? Do you think that money will prevent these students from finding drugs and alcohol? Really?

This thread is really taking a turn!

Why are parents so reluctant to take out loans?

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