Like Ms. Weihl, the Donohues borrowed federal money, in the form of Parent Plus loans. Another option for parents and grandparents is co-signing private loans. Both carry their own risks.
Parent Plus loans “basically fill the gap between what a child might qualify for on their own, which is usually not very much, and the cost of attendance,” said Jessica Ferastoaru of Take Charge America, a nonprofit provider of student loan counseling for the National Foundation for Credit Counseling. Often, a student will max out federal student loans before turning to private or Parent Plus loans. According to the Education Department, dependent students qualify for $5,500 to $7,500 in loans per year.
Plus loans differ from private loans in a few important ways. One, there is no cap on loan amounts and, in Mr. Donohue’s opinion, not much in the way of warnings to discourage parents from asking for unmanageable sums. “When you apply, their formula is not complete enough,” he said. “What ends up happening is they give out money too easily, and you backslide.”
Another way they differ from private loans is that the signing parent — grandparents are ineligible for Parent Plus loans unless they have adopted the grandchild — is on the hook exclusively for repayment. In addition, “there’s no way to transfer these loans to the student, and the interest rates can be quite high,” Ms. Ferastoaru said, adding that the current rate is about 7 percent.
The risks in co-signing a private loan include fewer repayment plan options; the possibility that the student will miss or skip payments, leaving the co-signer responsible; and an increase in the balance if the loan has an adjustable interest rate, said Lori Trawinski, the AARP Public Policy Institute’s director of banking and finance. In 2017, AARP Research conducted a study of 3,300 people over age 40 who took out loans for someone else, most often children or grandchildren. Among those 50 and older who co-signed a private student loan, 25 percent had to make at least one payment because the student borrower did not.
Those on the older end of the study group were more likely to default than younger co-signers. Decreased income levels after retirement, higher medical expenses and tighter budgets are the likely culprits, Dr. Trawinski said. According to a 2016 Government Accountability Office report, nearly 40 percent of borrowers 65 and older were in default on federal student loans. Dr. Trawinski suspects that number is rising steadily, a result of upticks in Parent Plus borrowing. “Family incomes have not increased enough to keep pace with inflation, much less the dramatic increase in college costs over the past several decades,” she said.
That pension option Mr. Donohue chose provides about $1,000 a month, and his student-loan payments are about the same. To cover living expenses, Mr. Donohue recently went back to work in customer service at Sprouts, a local grocery store. Before he took that job, he and his wife were dipping into their 401(k). Ms. Donohue is not working while she cares for her 94-year-old father.