For more than 30 years, the federal Parent Loan for Undergraduate Students — or PLUS loan — has helped parents meet the gap between the financial aid their children receive and the total cost to attend college. Once a relatively small program, PLUS has grown steadily over the years as college costs have increased and home prices trended downwards.
The use of h ome equity loans, once a prime competitor to PLUS loans, declined as home prices sank during the last recession and many families found themselves upside down on their mortgages. T he National Center for Education Statistics reports that 20 percent of parents took out parent PLUS loans for their child’s education in 2011-12, up from just 4 percent in 1989-90. A round 3.3 million parents are repaying more than $75 billion in outstanding PLUS loans.
[Get answers to frequently asked questions about parent PLUS loans.]
The need for parental loans shows no sign of decreasing. Many Generation Xers are sending their children to college while still paying back their own student loans, which means less money for their children’s education. According to the Associated Press, approximately 6 million Gen X households still hold student debt, and those who carry student debt and have teenage children average just $4,000 in college savings plans.
But will the federal parent PLUS loan be around to offer a helping hand? For years, controversy has swirled over whether the PLUS loan is actually unfair to the borrower.
Parent PLUS loans are not need-based — borrowing is only limited to the full cost of attendance minus any other loans and grants the student receives. Further, these loans are granted as long as the parent doesn’t have adverse credit.
[Discover four things borrowers don’t always know about parent PLUS loans.]
The borrower’s ability to pay or debt-to-income ratio are not taken into account. As a result, some say PLUS loans are a lifeline for low- and middle-income families who have no other way to afford college, while others argue that the loans have become a debt trap for too many.
After reviewing low-income families’ Free Application for Federal Student Aid, the federal government often determines that these individuals do not have the financial resources to contribute toward college, and the student will qualify for the federal Pell Grant and other forms of need-based financial aid. Yet the student’s parents may still borrow a federal parent PLUS loan to the tune of thousands of dollars per year.
For the student, borrowing for college is often a wise investment because he or she will be better equipped postgraduation to attain the income needed to repay the debt. But the parents receive no monetary benefit from their child’s education and will have a several-hundred-dollar monthly payment. Further, parent PLUS loans have higher interest rates and less generous repayment terms than federal student loans.
Private market enthusiasts argue in favor of ending the federal parent loan program and turning these loans over to private lenders as a means to prevent subprime borrowing and stop runaway college costs. The thought is that colleges’ access to an unlimited supply of federal PLUS funds allows them to drive up tuition.
A few years ago, though, we saw a preview of what a world without federal PLUS loans might look like. Prior to 2010, private lenders that made parent PLUS loans through the Federal Family Education Loan Program used a set of adverse credit standards that were more stringent than those that the federal government uses for d irect PLUS loans.
[Parents think hard before borrowing for or with their student.]
In 2010, Congress ended FFELP, and in 2011, the Obama administration brought the credit criteria for d irect PLUS loans in line with the then more rigorous rules that lenders used . As a result, Kevin Carey, director of New America Foundation’s education policy program, said, “The proportion of Parent PLUS applications denied because of bad credit increased from 28 percent to 38 percent in a single year. Over all, some 400,000 applications were denied.”
Many colleges were adversely affected with enrollment declines. And while some would argue that’s 400,000 parents who weren’t caught in a predatory loan, it’s also still 400,000 students who had to either turn to some other form of financing or make the heart-wrenching decision to drop out.
Private loans, with much tougher credit criteria, would never be an option for someone denied a PLUS loan without a co-signer. And yes, the student certainly could transfer to a cheaper college but that undermines the original intent of federal student aid for higher education : to ensure access and choice to academically qualified students.
For this reason, any move that Congress or the White House makes to discontinue the federal PLUS program will face staunch pushback from the higher education community and many consumer advocates. However, some common-sense reforms are far more likely in the short term, such as increased counseling and information for parent borrowers before they borrow, borrowing caps on PLUS loans and annual publication of the parent PLUS default rate so that colleges can be held accountable for higher-than-average rates.
In the meantime, parents shouldn’t wait for lawmakers to develop a solution to the PLUS trap. Educate yourself on the potential pitfalls and have a frank conversation with your children now about what paying for that dream college will mean down the road for your financial security.
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Parent PLUS Loans Face Potential Reform originally appeared on usnews.com
