Opening the Door to More College Debt
The government wants to make it easier for parents with flawed credit to take out loans to pay for their children’s college education. Currently the U.S. Department of Education rejects Parent PLUS loan applicants with debt payment delinquencies of 90 days or more within the past five years. A proposal would cut the period under scrutiny to two years and allow for almost $2,100 in bad debt, according to a department document released in May. In either case, applicants can be rejected for other problems, including a default, bankruptcy, or foreclosure during the past five years.
Many parents have found it easier to qualify for PLUS loans than other loans because income and assets aren’t considered—only credit history counts. Consumer advocates say the proposed relaxation of rules will hurt borrowers and default rates will climb.
One potential problem is that parents are not required to start making payments until six months after their children graduate or leave college—the interest due during that period is added to the amount of the loan. The majority of parents borrowing with PLUS loans choose to defer payments, according to Chris Greene, a spokesman for the education department’s Office of Federal Student Aid. “Some of these loan characteristics—potential payment shocks and not verifying a borrower’s income—certainly strongly contributed to the mortgage crisis,” says Katie Buitrago, senior policy analyst at the Woodstock Institute, a nonprofit focused on fair-lending issues. “If you are deferring for four and a half years, that’s a lot of time for your financial situation to change.” Denise Horn, an education department spokeswoman, declined to comment on why the department wants to change the rules.
When Parent PLUS loans were first offered in the 1980s, repayment had to start immediately, while children were in school. Amid the financial crisis in 2008, Congress changed the law to allow deferrals. When the time comes to pay, many parents are startled by the higher balance, which 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,” notes Susan Dynarski, an economist at the University of Michigan. “I don’t understand the logic behind deferral on a PLUS loan.”
Through the PLUS program—which now has $62 billion in loans outstanding—parents can borrow an amount equal to the cost of attendance, which includes tuition, room and board, and extras such as travel, minus any aid the student receives. One year at a private college can cost more than $60,000. But parents who have trouble meeting their PLUS obligations don’t have the option of income-based repayment, a protection offered with federal loans made to students. “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,” Woodstock’s Buitrago says. “It’s much more difficult to discharge PLUS loans in bankruptcy than mortgage loans.”
Many Parent PLUS borrowers have modest assets and income. In the 2011-12 year, about 36 percent of students whose parents took out the loans also received Pell grants, which are for low-income students, according to data from the National Center for Education Statistics. “A good share of these families are not the most financially secure households,” says Thomas Weko, a former Department of Education official who is now at the nonprofit American Institutes for Research. “A decent number of people are going to get in trouble.” The department doesn’t have the legal authority to impose an “ability to repay standard” for eligibility for any of its loans, says Horn.
In March the department released default rates for Parent PLUS 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—which account for 13.7 percent of the total—had the highest default rate for Parent PLUS loans, at 13.3 percent, up from 6.3 percent during the same period. The rate at four-year public colleges was 3.1 percent, up from 1.9 percent, while at private, nonprofit four-year colleges it was 3.4 percent, up from 2 percent. “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,” says Suzanne Martindale, an attorney for Consumers Union. “That’s frightening.”