The need for creditworthy co-signers is relatively commonplace; this shared-borrowing model is critical to reducing lender risk for many loans, including those for cars, homes and even college. But, for private education loans, when does the balance tip excessively in favor of providing security to the lender?
Education debt nearly is a practical puzzle. For many students, this lending proves crucial and extends enormous utility. Stickiness usually surfaces only after a student graduates and his or her loans enter repayment. While debt dollars or repayment problems may differ across academic majors and college settings, students should be reasonably able to defer their education loans, regardless of lender, while enrolled in school.
When borrowing for education, students often draw first on federal student aid programs, which provide benefits typically missing from private lender agreements. Federal student loans generally charge lower interest rates, rarely require a co-signer and delay repayment while borrowers are enrolled in school. Students usually turn to private loans when government aid is exhausted or their program of study is ineligible for federal aid.
While the financial obligations of these loans are regularly debated and stressed, challenges loom when students pursue additional degree programs, delaying their income-generating careers even as loan repayment is enforced. As an example, the plight of medical students, who face remarkably lengthy training and especially high education costs, lucidly demonstrates why policies on private education lending need improvement.
The average age at medical school matriculation has been consistently increasing; a 2014 survey of first-year students by the Association of American Medical Colleges found that 58% had graduated from college more than a year ago. Each student has his or her own reasons for delaying entry, such as pursuing professional experiences, graduate programs or premedical courses.
This trend has important implications for repayment terms. In seeking more schooling, for example, students may increase their need for private education loans. Private loans usually need co-signers and co-signers are usually parents. At the same time, repayment schedules for these nonfederal loans remain unaffected by future academic enrollment status.
The inability to defer private education loans adds tremendous pressure to these students and their families. If a student is in school when repayment must begin, there is an unavoidable shift of responsibility to the co-signer. Is this always fair?
As a student ages, so do parents. If the gap between degree programs is greater, a parent might retire or become a fixed-income budgeter by the time his or her offspring matriculates. This, by no means, precludes a co-signer's obligation. But should parents face that burden even before the student has had the chance to enter his or her profession and attempt to take responsibility for repayment?
Debt discussions could seemingly deepen by arguing the borrower's risk awareness, advantages and disadvantages of free market loans, or unyielding college costs. However, hard-lined loan terms, from the very beginning, disregard a student's predisposition to start repayment once he or she is no longer enrolled in school. Without reasonable reform, many students will be limited in manageable options to fund their advanced training and co-signers will increasingly face inadvertent financial hardship.
Student debt is a complex issue and remains a well for wrangling. For federal loans, there has been a rise in more reasonable repayment plans, public service loan forgiveness programs and interest rate limits.
There should be similar changes in private education loans. Stipulations as to course load or program eligibility can be debated. The handling of interest accruals during these periods also demands consideration. By unlinking enrollment status and repayment ability, however, private education loans create premature pressure points without significant chance for relief. Defaults unarguably rise, stressing the student loan system and harming the student's financial future. This occurs in all fields of study, not just medicine.
Why is this even necessary? Higher interest rates, limited deferment options and creditworthy co-signers already provide ample compensation and security for this lending. Private education loans, thus, seemingly wield redundant rigidity. For the sake of students and their families, however, something has to give and, this time, it shouldn't be from them.
Another version of this essay was previously published by the Pittsburgh Post-Gazette.