A decade ago, a debt crisis was looming; erected upon the twin foundations of mortgage and consumer debt. The downturn of 2008-2009 shifted that as lenders realized that much of the debt they had issued could not or would not be repaid. While the availability of credit has been more limited in recent years in the consumer and commercial markets, lenders have shifted to student loans as a substitute. The difficulty here is that these loans are based on little more than assumed levels of post-graduation earnings. As we have seen, the job market for college graduates is not what it once was and herein lays a problem that is affecting the divorce process.
For lenders, student debt enjoys a special safe harbor in that student loans are ordinarily not dischargeable in bankruptcy. But lenders recognized that the advantage of non-dischargeability came with the risk that the students simply “walked” on the debt; paying nothing. So lenders began to press for parents of students to “co-sign” the student debt. And co-sign they did taking student debt owed by adults ages 60 and older from $15 billion in 2007 to $43 billion in 2012. It is self-evident that adults 60 and up are not typically students of any kind and that those who are pay for education out of current income or savings.
We all understand that parents and grandparents want their children to succeed and for most of American history, investments in post-secondary education have yielded excellent returns financially. But today, labor markets are not absorbing college graduates in the same way they did 20-30 years ago. According to U.S. News & World Report over the past decade college tuition has risen a stunning 79%, almost double the rise in health care costs. But a recent study from the San Francisco Federal Reserve Bank indicates that from 2006-2013 wages for recent college graduates grew by only 6%.
Parents faced with the dilemma of either guaranteeing student debt or seeing their children drop out are stepping up, but they do so at considerable risk. If the child cannot pay his own student debt, the guarantor parent will have to. And what parents don’t seem to consider is the fact that as they age, their life in the workforce is coming to its end. The response of many is that they expect to keep on working far beyond what used to be called normal retirement at 65. But while those who are self-employed may have that option, many older workers are finding that they are targeted when businesses elect to reduce their labor forces. Parents also tend to assume, they will always be able to work. But that assumption ignores the fact that as we age, we become less healthy.
These financial commitments to help children are causing a rippling effect in the domestic relations field. An intact couple with roughly $80,000 in earnings can often absorb several hundred dollars a month in guaranteed student debt. But once that intact couple separates and now resides in two households, the student debt service becomes unsustainable.
We have come to see post-secondary education and training as a kind of birth right. Today, like any other form of investment, education costs should be viewed in the same light as the prospectus of any financial instrument. “Past Performance is not necessarily indicative of future results.” This is true enough for the student but potentially disastrous for the parent with assets who signs the guarantee for a $50,000 obligation when, at age 50, his expected life in the work force is already 2/3 behind him.