PLUS loans are the only federal student loans that come with some “creditworthiness” requirements. Basically, the government will deny an application if the parent is considered delinquent for 90 days or more on the repayment or a debt or has been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a student loan in the past 5 years. Parents can appeal denials based on extenuating circumstances. In 2011, the Department tightened the credit standards for parent PLUS loans by deciding to go back five years instead of just 90 days in looking at a borrower’s delinquent accounts and charge-offs. The decision stemmed at least in part from concerns about increased PLUS loan borrowing, very high PLUS loan acceptance rates and increased default rates. (We don’t really know the extent of PLUS loan defaults, however, because the Department does not include PLUS loan in the cohort default rate statistics). The fact that so many PLUS loan borrowers are struggling should not be all that surprising given the rough economic conditions in our country, combined with the relatively high cost of PLUS loans and the limited number of repayment options. Most Direct PLUS loans have fixed interest rates of 7.9%. Going forward, the new fixed rate (at least for now) is 6.41% with origination fees of just over 4%. Most distressing of all, parent PLUS borrowers are not eligible to repay through the income-based repayment programs. It is true that some parent PLUS borrowers can consolidate their PLUS loans and apply for ICR (which has higher payments than IBR), but even this option can be complicated. (See the Department’s answer to Q12 explaining this option). If the borrowers decide to separate their PLUS loans and non-PLUS loans and apply for IBR only for the non-PLUS loans, they will find that their often significant PLUS loan debt is not considered in determining the IBR payment because PLUS loans are not eligible loans. The dangers of PLUS loans are very real to these borrowers. If they default, parent PLUS borrowers face the full range of draconian government collection powers. Yet the outcry from the Department’s rule changes centered on the harm to schools, not borrowers. For example, PLUS loan denials increased by 50% for parents of students at historically black colleges and universities (HBCUs), costing the institutions about $50 million in enrollment revenue. The Huffington Post even reported that at least some HBCUs were considering suing the Administration over the changes. Affected schools and their allies pushed the Department to reconsider the restrictions. The Department responded first by making some changes to the borrower appeals process and then in August 2013, agreeing to review the rules in upcoming negotiated rulemaking sessions and in the meantime taking steps to make it easier for parents who were initially denied PLUS loans to receive loans on appeal. There is no question that the changes harmed many colleges’ bottom lines, which also harms students. The real question is about a system of higher education that is dependent on parents taking out relatively expensive loans with limited flexible repayment options. This doesn’t mean that the Department’s specific changes made sense. Perhaps collection and write-off history are not the most relevant factors in assessing ability to pay. But shouldn’t the government be concerned about evaluating a parent borrower’s ability to repay before extending the credit? To be fair, school officials have not only talked about their bottom lines, but have also raised legitimate concerns about the way the Department went about making these changes. The Department did not publicize its decision very well ahead of time and apparently did not seek public input. Many of the school officials testifying at recent Department of Education hearings made this point, urging the Department to consider PLUS loan credit standards in an open environment. For the most part, however, the school officials talked about the devastating impact on enrollment at their schools. This is understandable given their interest in keeping their doors open, but one would also expect the officials to at least mention the need for relief for struggling borrowers. This didn’t happen much. For example, only a few school officials raised concerns about the limited repayment options available to parent PLUS loan borrowers. One school official, President Freeman of Albany State University, went even farther, talking about how institutions have been trying to move away from Stafford loans. President Freeman testified: “We know that the federal government monitors our default rate. We certainly monitor our default rate, and this is one of those canaries in the mines, that if we do not return to provisions that allow for a credit formula that makes sense, we will, indeed, find an increase in the Stafford loan and the corresponding negative impacts that defaults will create.” Negative impacts? President Freeman appeared to be focused on the negative impacts on schools because Stafford loans are counted as part of default rate calculations, but PLUS loans are not. What about the impact on borrowers? Compared to PLUS loans, Stafford loans are lower cost loans with much more flexible repayment options. It is understandable that the schools are worried about the hit to their enrollments. Many of these schools provide invaluable educational services. The question (big elephant in the room) is the cost to students and their families. As New America emphasized, ”Parent PLUS loans should be a cautious loan of last resort..Parent PLUS loans should never be the strategy for maintaining access in the face of rapidly rising college costs.” Yet this is how school officials talk about the program, in one case at the Atlanta hearing describing the PLUS loan as for many “…the only avenue for the exit of poverty and the achievement of any kind of middle-class status and participation in the modern work force.” It is also important to ask whether the PLUS loan changes really denied access to higher education completely or denied access mainly to costlier schools. As New America points out, many of the students in these cases did go to school, … Continue reading →
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