We have written previously about the problems with parent PLUS loans. This new issue brief summarizes the ways in which parent PLUS loans can be very dangerous products for borrowers and reasons why schools have incentives to push these loans.
Parent PLUS loans can be very dangerous products for borrowers because:
- The current PLUS loan interest rate is 6.41%. And this is historically low. Most older PLUS loans have interest rates of 7.9%. In comparison, the current Stafford loan interest rate is 3.86% for undergraduates.
- PLUS loans currently have origination fees of 4.2% compared to NO FEES for other federal loans.
- Unlike all other federal student loans, there are no explicit borrowing limits for parent PLUS loans. Parents may borrow up to the full cost of attendance, which is determined by the institution, not the government, and includes books, travel and living expenses.
- There are no ability-to-repay standards for PLUS loans. There are only minimal credit standards that most borrowers are able to meet initially or on appeal.
- Parent PLUS loan borrowers are not eligible for income-based repayment (IBR) and therefore have fewer options for avoiding default and its consequences.
- A parent PLUS loan consolidated with other loans taints the entire consolidation loan so that the borrower cannot repay using IBR.
- Similar to other federal student loans, parent PLUS loans are nearly impossible to discharge in bankruptcy.
- Parent PLUS loan borrowers in default face the full range of draconian government collection powers, including wage garnishment, Social Security offsets and tax refund offsets. There is no time limit on government collection.
New America released a policy brief this month providing even more detail on the dangers of parent PLUS loans. New America’s “The Parent Trap” not only highlights the dangers of parent PLUS loans, but also explains the real consequences of the Department of Education’s decision in 2011 to tighten credit standards for PLUS loans. Most of the publicity about the changes has focused on the revenue and enrollment losses at historically black colleges (HBCUs). In fact, according to New America, since the change in the credit standard went into effect, for-profit colleges have lost about $790 million more in PLUS loan disbursements than HBCUs. HBCUs only make up a small share of volume in the parent PLUS loan program. About 2% of all undergraduates are in HBCUs and these institutions represent between 3 and 4 percent of PLUS borrowers. In contrast, from 2006 to 2011, the share of for-profit undergraduate enrollments was about 10%, but accounted for 16 to 18 percent of total parent PLUS loan recipients. (This is particularly significant since for-profit schools have been viewed as focusing on the needs of adult students who do not qualify for parent PLUS loans). In addition, since the Department’s policy change, over 72% of the institutions that lost the largest number of PLUS loan recipients and 87% that lost the largest amount of disbursements are from the for-profit sector. The rest of the schools are high-priced nonprofit colleges and public universities.
It is unfortunate that this issue has been framed as an anti-HBCU issue instead of a pro-borrower issue. Getting the facts straight is particularly important in light of the upcoming negotiated rulemaking sessions. These meetings are scheduled to begin on February 19 and the issue of PLUS loan credit standards is on the agenda. This is likely to be one of the more contentious issues at the table. We urge the Department to take this opportunity to review the existing standards and seek input. It may be a good time to consider new standards, but there must be strong standards to protect borrowers, including ways to measure a borrower’s ability to pay.
We regularly hear from financially distressed parent PLUS loan borrowers. Too many end up in default in many cases because they have fewer options than other federal loan borrowers. We urge borrowers to let us know your stories and let the Department know too.