- Paying for a child's college education can be hazardous
- `We're impoverishing the less-privileged population'
The U.S. government is sitting on a growing pile of debt backed by little more than parental love.
That’s because parents can borrow tens of thousands of dollars a year for their kids’ college education without showing they can pay it back. About 3 million parents have $71 billion in loans, contributing to more than $1.2 trillion in federal education debt. As of May 2014, half of the balance was in deferment, racking up interest at annual rates as high as 7.9 percent.
“It’s deeply problematic that the federal government is making relatively high-interest loans without thinking about, much less checking, whether the people they’re lending to will be crippled by this debt,” said Toby Merrill, a Harvard Law School lecturer who has counseled defaulted parents through the school’s Project on Predatory Student Lending. “We’re impoverishing the less-privileged population who are aging. That’s a terrible policy.”
The U.S. Education Department, which administers the parent PLUS loan program, doesn’t regularly provide performance data, even though taxpayers will have to foot the bill for any unpaid debt. The last time the agency released default rates for parent loans, in 2014 for the group that deferred payment until their kids left school and began repaying in 2010, the rate was 5.1 percent, up from 1.8 percent four years earlier. It has projected that loans originated in 2014 will default over their lifetime at a rate of 10.2 percent.
In August and October, the department denied Freedom of Information Act requests by Bloomberg News seeking parent default and deferment numbers by college, saying it “has yet to complete its analysis” by institution. The agency provides default data annually, broken out by school, for most student borrowers. Those rates help determine which schools can continue to access the loan program.
“We can’t fix problems in the student-loan programs if researchers, policy makers and consumers don’t have access to the information they need,” Senator Elizabeth Warren, a Massachusetts Democrat, said in an e-mailed response to questions.
Senator Lamar Alexander, the Tennessee Republican who chairs the Senate Health, Education, Labor and Pensions Committee, plans to look at ways to improve the disclosure of loan information in forthcoming legislation, according to a spokeswoman.
Denise Horn, an Education Department spokeswoman, said the government is committed to keeping college accessible and affordable, while helping families make informed choices about borrowing, including parent loans.
“As part of those efforts, the department offers loan counseling to all PLUS loan applicants to empower parents with additional details on their loans,” Horn said in an e-mail. “We believe this is an important component to ensuring borrowers are aware of and understand their repayment obligations.”
Maria Correa, a 63-year-old secretary and breast-cancer survivor, is one of those parents being crushed by debt. Correa, who moved to Chicago from Manila in 1982, began borrowing from the government in 2009 to help send her daughter to DePaul University, a private college in Chicago. She took out $120,000 in parent PLUS loans over four years, in addition to the $27,000 her daughter borrowed from the government.
Parents like Correa can borrow the entire cost of a child’s college education -- in some cases more than $50,000 a year -- without having to provide income data. The government requires only that they don’t have “adverse credit” for two years, a duration reduced from five years by the Education Department last year. Applicants can have loan balances of $2,100 that are delinquent 90 days or more, are in collection or charged off and still qualify for a PLUS loan.
“It was so easy to get the loan,” Correa said over lunch at a Macy’s store in downtown Chicago, near the office where she has worked for the past 27 years. “I tried my best to help out with my daughter’s needs.”
Correa’s family budget “spiraled down,” she said, after her husband, Marc, now 68, suffered a stroke in 2010 that left him paralyzed on his right side and permanently disabled. He previously was employed by a restaurant group at Chicago’s O’Hare Airport repairing equipment. Now his Social Security checks mostly go to pay for medication, Correa said.
Correa deferred repayment while her daughter was in college, as a law passed by Congress in 2008 allowed her to do. Now she’s in the second year of a maximum three-year hardship deferment. Meanwhile interest has been accruing on her 7.9 percent loans, swelling her debt to almost $170,000.
“Every day it’s on my mind,” said Correa, who lost her house in 2012 because she couldn’t afford the monthly mortgage payments of more than $2,000. “How am I going to pay it?”
Correa, who moved with her husband to their daughter’s home in Bolingbrook, a Chicago suburb, said she plans to use the third year of her hardship deferral and then enter a 25-year repayment plan that will lower her monthly bill to about $1,500 based on her current balance, instead of $2,000. If she makes every payment, she would be at least 90 when the debt is paid off.
“I don’t know if I will default,” said Correa. “I don’t know when I’ll retire.”
Correa’s daughter, who requested that her first name not be used, majored in journalism and public relations at DePaul, graduating in 2013. She works for a nonprofit organization in Chicago and said she pays about $400 a month on her loan.
DePaul, the largest Catholic university in the U.S., cautions parents and students to borrow only what is prudent, Jon Boeckenstedt, associate vice president of enrollment and marketing, said in an e-mail.
“We cannot control how much a parent borrows on a PLUS loan for an undergraduate,” he said.
Parents can borrow to cover tuition, room, board and books, minus grants or loans the student receives. PLUS loans also carry an origination fee of 4.3 percent. The current interest rate is 6.8 percent, and it was almost 8 percent from July 2006 to June 2013.
“When money comes from the government, a trusted source, parents do have good reason to borrow,” said Merrill, the Harvard lecturer. “But the problem is their income is not going to change based on their kids’ education.”
Parents aren’t eligible for most programs that offer reduced payments for struggling student borrowers based on income.
For older borrowers like Correa, the burden can be onerous. About 17 percent of parent loans held by borrowers 65 to 74 were in default in 2013, according to Education Department data provided for a 2014 Government Accountability Office report.
Older borrowers who default on education debt can have Social Security payments garnished. The practice is of such concern to Senators Warren and Claire McCaskill, a Missouri Democrat, that they asked the GAO in April to study the impact.
Congress doesn’t require data on parent loans to be reported annually by school, the same way it is for student borrowers. While the Obama administration has pushed for transparency by publishing data about cumulative loans and repayment rates for student borrowers, it doesn’t apply to parents. The Education Department, which said last year it would release performance measures for parent PLUS loans “where appropriate,” hasn’t made such information available.
“It’s dangerous that the program is opaque about its likely future losses,” said Deborah Lucas, a former chief economist for the Congressional Budget Office and now a professor of finance at Massachusetts Institute of Technology. “That’s a situation that really needs to change given the magnitude of the potential losses in this program.”