The Wall Street Journal has an important story on a phenomenon that’s likely to get more attention by virtue of growth: that of middle aged and elderly Americans saddled by significant amounts of student debt. Past reporting has focused mainly on the older Americans who have loans outstanding by virtue of borrowing to fund education as part of a mid-life career change, and then being unable to meet the payments as a result of finding it difficult to get established on the targeted employment path. But the culprit overwhelmingly appears to be parents co-signing on private student loans, since federal loans generally don’t require a guarantor (note that, as with mortgages, there is no granular data here).
The indicator is the rapid increase in student debt owed by older Americans. According to the New York Fed, 2.2 million Americans over 60 owe $43 billion in student debt as of March 31, 2012, up from $15 billion at the end of 2007. Similarly, student debt as a percentage of all installment debt of those 65 to 74 as of year end 2007 was so small that the Fed didn’t report it; as of 2010 (the latest information available) it had risen to 13%. And remember, because student debt can’t be discharged in bankruptcy, Social Security payments can be garnished. Per the Treasury’s Financial Management Service, only 6 people had their Social Security payments garnished to pay student loans. For January to August of this year, it was 115,000 people and that level was nearly double the number last year.
The Journal presents several anecdotes, and the subtext is that the inability of young borrowers to meet their loan payments is producing generational warfare right at home. The first is of Cyndee Marcoux, 53, who already had $80,000 of student debt by virtue of going to school after a divorce. She co-signed both of her children’s loans. Her daughter, though employed, has developed an autoimmune disease and is swamped by medical bills and child care costs. Notice this:
The younger Ms. Marcoux feels she is taking a calculated risk, because her husband owns their home and she has little savings. “If they sue us, they can’t get anything,” she says. But her mother sees things differently; she even moved in with her 83-year-old mother to pare expenses and make payments on Jocelyn’s loans. “I have to,” she says. “I co-signed them.”
Another example of intergenerational debt:
Pam Gerke, a 49-year-old divorced fourth-grade teacher in Davison, Mich., owes $98,000 on her own student loans—too much, she says, for her to co-sign her daughter’s loans for beauty school. So Ms. Gerke’s mother, Darlene Kuhn, did so instead.
After the daughter dropped out and quit making the $200-a-month payments on her debt in 2010, the 72-year-old Ms. Kuhn took over. She says she fears her credit rating will fall, so she draws from the $1,400 a month she collects in Social Security—her only income since retiring. “I tried to do a good deed,” she says. Indeed, both Ms. Kuhn and Ms. Gerke say they are bitter about the whole experience. (The daughter declined to return phone messages.) “My mother would rather not eat than not pay her bills,” Ms. Gerke says. “I’m mortified as a mother and a daughter.”
Another example is more in the “shit happens” category. A retired Fedex employee guaranteed $50,000 of his daughter’s loans. She had gotten an associate dental degree, and evidently planned to get further training, but her mother had surgery and the daughter stopped her studies to take care of her. Even though the career/income interruption was to help her parents, her father sounds angry and resentful that she has stopped making payments (one has the sense she could be doing more but these stories are all sketches).
The Journal also includes stories of children who are paying off loans as fast as they can out of concern for the risk to their parents of having co-signed. And it has this grim warning:
Financial experts say given a whole set of affairs today—the rate school student debt is growing, the state of the economy, and the fact many parents are approaching retirement—the co-signing dilemma is only likely to escalate.
They also worry about a “cascading effect” on the next generation of parents, because one-third of college graduates in the past year are expected to be eligible for a 20-year repayment term.
America has created an indentured class in a remarkably short period of time. Having debt extend across generations institutionalizes the gap between the haves and the have-nots.