A Rescue or a Trap? An Analysis of Parent Borrowing of Student Loans

Wenhua Di , Federal Reserve Bank of Dallas
Carla Fletcher, The Trellis Company
Jeff Webster, The Trellis Company

While college education can potentially generate higher returns later in life, parents who borrow loans for children may face excessive repayment burden. This paper examines the experience of Parent Loan for Undergraduate Students (PLUS) borrowers using administrative records of a large student loan guaranty agency. We find that parent PLUS loans in general outperform loans borrowed by students but parent borrowing has its own risks and the outcome varies among borrowers. Parent borrowers whose children attended Minority Serving Institutions (MSIs) likely have paid down less debt and are more likely to default than those supporting children who attend non-MSIs. Through interviews with borrowers, we find that PLUS borrowers have more experience handling debt than their children but may not have fully expected the repayment obligations nor had sufficient communications with their children regarding the financial responsibility. This study sheds light on an understudied aspect of college financing.

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 Presented in Session 166. Race, Wealth, and Debt