Parents, beware: College lenders are targeting you
Parents are the new growth area for college lending.
Lenders including SLM Corp. (SLM), widely known as Sallie Mae, and online lender Social Finance (SoFi) are among those seeing parents of college students as lucrative prospects. The boom in products aimed at them is riding on two trends: the continuing rise of college tuition and a quirk in federal reporting of loan data that makes private loans to parents more advantageous for colleges.
The new loans may be tempting because they generally cost less than federal loans, according to The Wall Street Journal. The bottom line for parents, though, may be unchanged: Focus on your own retirement, rather than financing your child's college degree. After all, lenders aren't interested in helping you out in retirement, and most Americans are already poorly prepared for their golden years.
On top of that, these loans may do more harm than good over time because they aren't included in the Department of Education's report card on the median amount of debt graduates of each school carry. That means colleges have an incentive to promote the loans.
"Only use these loan products if you can save money versus the federal PLUS loans," said Nate Matherson, the co-founder and CEO of LendEDU. "I don't think student financial aid offices should be pushing these products. They should stay unbiased and act as an informational source."
SoFi, for one, created a private loan targeted to parents in 2014 based on a request from Stanford University, which told The Journal it was trying to provide more options for parents. Other colleges that are referring parents to private loans include Boston College and Carnegie Mellon University, according to the publication.
The push comes after the education department created its college scorecard, which allows students and their families to research colleges by a number of yardsticks, including average annual cost and the typical total debt load of graduates. But the scorecard only tracks students who received federal aid, which means private loans are excluded from the calculations.
Still, the loans may provide a cheaper way to finance a child's education. Sallie Mae's private loan will offer interest rates as low as 3.75 percent, while the federal PLUS loans have a rate of 6.84 percent. One reason federal student loans carry far higher interest rates is that the government doesn't sort borrowers by credit score.
"Everyone qualifies for federal student loans," Matherson noted. "The interest rates will be higher because it's an inefficient market."
Parents with good credit scores might save some money by signing up for private loans, but that doesn't solve the underlying issue: the rising cost of college. The annual cost of tuition and room and board at a private, nonprofit, four-year college has surged 156 percent since 1971, reaching $43,921 in 2015, according to the College Board.
Parents "probably do understand the risk that taking on student loan debt on their own name could delay their retirement," Matherson said, "but they want to help their son or daughter get a college education."