Parents whose financial standing disqualify them from most loans may have an easier time borrowing to pay their children’s college costs under a U.S. government proposal to ease credit standards.
The plan doesn’t sit well with consumer advocates and economists, who are sounding an alarm. The Education Department wants to look at “adverse credit” over two years instead of five and consider approving loans even if parents have delinquent credit balances, according to an agency document released this month.
Consumer advocates say loosening the norms for parent PLUS loans will only hurt borrowers, and default rates, already on the rise, will continue to climb. Just 45 percent of the outstanding $62 billion in parent loans are being actively repaid, mostly because borrowers don’t need to make payments until six months after their children graduate or leave college, according to department data. Families are struggling to pay for college as the costs increase faster than the rate of inflation.
“Some of these loan characteristics -- potential payment shocks and not verifying a borrower’s income -- certainly strongly contributed to the mortgage crisis,” said Katie Buitrago, senior policy analyst with the Woodstock Institute, a Chicago-based nonprofit group focused on fair-lending issues. “If you are deferring for 4 1/2 years, that’s a lot of time for your financial situation to change.”
When Parent PLUS loans were first offered in the 1980s, borrowers had to start repaying right away, while their children were in school. Congress changed the law in 2008 amid the financial crisis, letting parents defer payments. When the time comes to pay, many are startled by the higher balance that includes accrued interest.
“The idea that you wouldn’t have to pay anything for years might make it more likely you don’t pay attention to what the bottom line says,” said Susan Dynarski, an economist at the University of Michigan. “I don’t understand the logic behind deferral on a PLUS loan.”
The Education Department declined to comment on why it wants to change the standards and what the next steps are for the PLUS proposal.
Since a 1992 change in the law, parents have been able to borrow through the PLUS program up to the cost of attendance, minus any aid the student receives. One year at a private college can top $60,000. Parents who have trouble meeting their loan obligation don’t have the option of income-based repayment, a protection offered with federal student loans.
“If someone defaults on their PLUS loans, they’re subject to the draconian debt collection practices of the federal government, which include wage and benefit garnishment,” Buitrago said. “It’s much more difficult to discharge PLUS loans in bankruptcy than mortgage loans.”
The majority of parents borrowing with PLUS loans choose to defer, according to Chris Greene, a spokesman for the department’s office of Federal Student Aid. Interest rates are fixed for the life of the loans though parents need to take out a separate loan for each school year. The rate for the academic year starting July 1 is 7.21 percent, up from 6.41 percent currently and as high as 8.5 percent in 2009-2010. Parent PLUS loans also carry an origination fee equal to 4.3 percent of the loan amount, four times the rate for the most popular student loan.
In March, the department released default rates for parent loans for the first time. The rate for all schools rose to 5.1 percent for parents who deferred and began repaying in 2010, up from 2.6 percent in 2008.
For-profit schools had the highest default rate for parent PLUS loans in that time frame, at 13.3 percent, up from 6.3 percent. The rate at four-year public colleges was 3.1 percent, up from 1.9 percent, while it was 3.4 percent at private nonprofit four-year colleges, up from 2.0 percent. It’s unclear whether the default rates will be released going forward, said Denise Horn, a department spokeswoman.
Many Parent PLUS borrowers have modest assets and income. In the 2011-2012 year, about 36 percent of students whose parents took out the loans also received Pell grants, which are for low-income students, according to National Center for Education Statistics data.
“A good share of these families are not the most financially secure households,” said Thomas Weko, a former Education Department official who is managing researcher for post-secondary education at the nonprofit American Institutes for Research in Washington. “A decent number of people are going to get in trouble.”
The department had tightened some credit standards in 2011 to match the stricter requirements of private lenders, who a year earlier lost the ability to originate federal loans, Weko said.
Under the proposed standard changes, parents could have almost $2,100 in loan balances that are delinquent 90 days or more, are in collection or charged off, and still qualify for a PLUS loan. Under current rules, any delinquency of 90 days or more is a reason for rejection, and if a parent appeals a rejection, the Education Department has used a $500 threshold for bad credit. It would still look back five years for some metrics such as default, bankruptcy and foreclosure.
“Until we bring in some element of the ability to repay, I don’t know if we’re providing the right loans to the right people in the right amounts,” said Suzanne Martindale, an attorney for Consumers Union. “That’s frightening.”
The Education Department doesn’t have the legal authority to impose an “ability to repay standard” for eligibility for any of its loans, said Horn, the agency spokeswoman.