There are two primary means by which people can find themselves burdened by educational debt in middle age. One, is by making the mistake of signing a Parent PLUS loan for a younger relative. This is a mistake 100% of the time. No relative should sign such a loan for any reason. First, the origination costs and interest rates are high. Second, the signing party virtually always believes one or both of the following, neither of which is true.
One, they believe the interest is subsidized while the student is in college as it is for a Direct Subsidized Loan. This is not true. Interest accrues from the day the loan is disbursed. Payments are likewise due the month following disbursement of the loan; although, again so many people do not realize this since they can defer payments while the student is a full-time student.
The second falsehood believed by the signing relative is that the student (who is getting the Parent PLUS loan because they have maxed out their own loans) will repay the Parent PLUS loan. That often is not the case. When the student borrower doesn’t make the payments, the originator of the Parent PLUS loan will pursue the loan signer for payment. There are complicated ways to consolidate the Parent PLUS loan with the student loans and qualify for an Income Based Repayment plan, but accomplishing this requires the cooperation of the student borrower and a significant amount of time and money.
How big is the debt created by Parent PLUS loans? According to Student Loan Hero, today there is $81.5 Billion Dollars outstanding in Parent PLUS loans, which is owed by 3.5 million borrowers.
The second more common means that people find themselves deeply in educational debt in middle-age is that they decided to return to school later in life to seek further education. According to this 2015 Brookings Paper on Economic Activity, a greater proportion of the students enrolled between 2010 and 2016 were non-traditional, older students from a lower economic strata than was the case over the preceding decades. These non-traditional students often enrolled in for-profit schools and 2 year colleges with the belief that when they graduated the job market would have improved and they would have created more marketable skills.
According to the study these non-traditional students experienced nearly a 20% unemployment rate after leaving college and had a net pay decrease. It is this cohort of non-traditional student borrowers that largely account for the increasing rate of default, deferment and forbearance of educational debt over the last several years. While their initial amounts of debt were not large, their inability to repay any of the amount borrowed means a significant number of them owe more today than when they graduated.
Given that their wages can be garnished, any tax refunds taken and their Social Security taken if it exceeds $750 per month, and that their income will often fall below the state maximum family income for Chapter 7 purposes, these non-traditional borrowers are more likely than traditional borrowers to attempt to use the protections of the bankruptcy court to discharge their educational loans. We should start to see the increased filings from these borrowers in the next 2-4 years, especially if the US experiences another recession.