College Debt May Not Be a PLUS for Parents
The U.S. Department of Education will soon loosen the credit standards for parents looking to borrow to pay for college under the parent PLUS loan program. The new rules will be published next month and will go into effect for the next school year. Although this may look like a great solution for those struggling with tuition payments, some serious problems could arise, especially for students at historically black colleges. Before cheering the news, families and the government should be aware of the implications of the changes.
The PLUS loan is a federal loan families can use to finance as much as the entire cost of college at an interest rate of 7.21 percent. The College Board reports that for the 2012-2013 academic year parent PLUS loans represented 9 percent of all student loans. Loosening standards reverses changes made in 2011, when the DOE made the loans harder to get. Only the past two years of a borrower's credit will be considered, down from the current five years, and delinquent debts below $2,085 won't be considered at all. President Barack Obama's administration estimates the changes will enable 370,000 more parents to obtain PLUS loans.
Even with changes, the parent PLUS loan won't be right for every family. The total federal Stafford loan limit for students is $31,000; if a student's parents are turned down for the PLUS loan, that student is eligible for an additional $18,000 in federal Stafford loans, which carry a lower interest rate than PLUS loans. So, on average, families turned down for PLUS loans actually gain access to lower interest rates loans.
Of course, the higher Stafford loan limits for students whose parents' PLUS loan applications were rejected only go so far: If they were planning to borrow more in PLUS loans than the $18,000 increase in Stafford loan eligibility that comes with the PLUS loan rejection notice, borrowing capacity will be lower than if they'd been accepted into the program. But if parents are borrowing more than $18,000 on top of the student's borrowings of $31,000, the combined debt will exceed any reasonable notion of what one should really borrow for an undergraduate degree.
Historically black colleges were some of the most enthusiastic institutions in favor of loosening the standards. Their support was unsurprising because HBCUs were hit harder than other institutions when the borrowing rules for PLUS loans were stricter. The New America Foundation reports that for the 2012-2013 academic year (right after the changes made in 2011), nonprofit colleges and universities saw a 15 percent decline in the number of parent PLUS loan recipients. HBCUs saw their PLUS loan volume fall by 46 percent. With that drop came a decline in enrollment and revenue. Benedict College, a historically black college in South Carolina, saw a 20 percent fall in school revenue in the first year after lending standards were raised.
But for students at HBCUs, the resulting problems from taking on loans could be even more grave. While the stricter standards severely hurt enrollment at HBCUs, they didn't appear to have done anything to reduce default rates, at least in the short term. HBCUs graduate, on average, only about 42 percent of their students. That leaves many graduates of HBCUs with too much debt and no credentials that might help them -- or their parents, in the case of PLUS loans -- pay it off.
There are, of course, many factors driving those low graduation rates and high default rates: But whatever those issues are, they must be dealt with before we make it easier for families to sign up for larger piles of debt.
The debt problem is bad enough as it is: Black students are among the hardest hit in our escalating student debt crisis. According to the 2011-2012 National Postsecondary Student Aid Study, 89 percent of graduates of HBCUs left school with an average of $33,988 in debt -- compared with 68.6 percent and $29,284 at other colleges. Students who attended HBCUs were also twice as likely to have parents who took out PLUS loans as other graduates.
None of this is to detract from the possible benefits for students who attend HBCUs. And as we look for solutions to the college affordability crisis, ensuring that low-income students can access college in general and HBCUs in particular without crippling themselves or their parents should be a priority.
There are some other solutions, besides more families signing up for PLUS loans. Increasing the size of the Pell grant so it comes to close to covering the share of college costs it once did is important -- as is pushing states to restore their funding for public higher education to where they were 30 years ago. Private colleges should focus more of their financial aid dollars on need-based aid rather than merit-aid, so that they can help needy students afford college instead of helping wealthy families save money.
But while we fight for those changes, we must avoid being distracted by the narrow self interests of institutions whose goals of self-preservation and growth are unrelated to the broader social and economics purposes of higher education.
Deletes fourth paragraph and reference to College Scorecards.
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