The Problem With PLUS: How Parents Buckle Under the Weight of College Debt

The Problem With PLUS: How Parents Buckle Under the Weight of College Debt

Natalie Lynch borrowed $80,000 to send her three children to college – a debt she’s unsure how to repay. (Ellen Webber for USN&WR)

For Natalie Lynch, sending three children to college has been a source of pride. But with it came a nasty price tag: To top off the financial aid and loans her kids received directly, she borrowed $80,000 in federal loans herself to pay for their schooling – debt she’s now struggling to reimburse.

“I can’t afford to pay this all back,” says Lynch, who lives about two hours west of Boston. “I wish I could, but I can’t.”

At 48, Lynch may not look like your typical student loan borrower. She’s a midcareer empty nester, not a wide-eyed millennial. But thanks largely to a federal program known as Parent PLUS, which lends money to cash-strapped parents of college-age kids, she’s part of a growing cohort of older borrowers saddled with far more student debt than they can readily pay off.

As college costs have skyrocketed in recent years, student loan borrowers, in general, have aged: Consumers who are 60 and older now make up the fastest-growing segment of the student loan population, according to the Consumer Financial Protection Bureau. Their numbers quadrupled between 2005 and 2015, increasing from 700,000 to 2.8 million. And while some of this debt funds older Americans’ later-in-life degrees, the CFPB says the majority of older borrowers’ student loans are for a child’s and/or grandchild’s education.

Some parents may avoid student loans by tapping home equity, raiding retirement funds and emptying college savings accounts. But those, like Lynch, who won’t or can’t tap such assets increasingly cover their kids’ college costs through a combination of federal Parent PLUS loans and private debt.

Troubling as the loans can be for some parents, for the universities the program is essentially free money – which they have every incentive to maximize. Parents receive the loans directly from the government, so even as college costs rise, these loans fill a gap that enables the schools to limit the financial aid they must offer from their own endowments. The universities get their money upfront – and suffer no losses if the loans aren’t repaid. As a result, they have little reason to discourage parents from taking on excessive debt. Indeed, critics argue that in some cases, schools may be purposely downplaying the risks by packaging financial aid award letters in such a way that the Parent PLUS loans look more like gift aid than actual debt. (Intentionally confusing parents about the contents of their financial aid award package, however, is a violation of industry ethics, experts note.)

Moreover, while schools may be penalized by the Department of Education if too many of their undergraduates default on student loans, they aren’t held to the same standards when parents fail to repay student debt. That gives the schools extra incentive to pad award letters with high-interest parental loans.

“We set up this financing system that sort of screws families, where a school admits a student and offers an abysmal aid package that [the family] cannot possibly afford, given their income,” says Ben Miller, senior director for Postsecondary Education at the District of Columbia-based Center for American Progress. “And so you stick parents in this horrible situation of saying either, ‘I am really sorry you cannot go to your dream school,’ or ‘Yeah, you can go there, and I will shoulder incredible debt to pay for it.'”

And unlike their college-bound children, who can look forward to income-boosting diplomas and 40-year careers, parents’ income often falls as the loans come due, as they head into retirement, cut back on hours or deal with age-related illnesses.

This series was produced in partnership with the McGraw Center for Business Journalism at the City University of New York Graduate School of Journalism.

Nevertheless, it’s relatively easy for parents to get into budget-busting amounts of debt – much of it green-lighted by the Department of Education with little regard for their ability to repay. When parents take out a Parent PLUS loan from the Department of Education, no loan officer considers their income or other outstanding debt, or adjusts the loan amounts to meet an individual’s debt tolerance. While dependent college students can typically take on no more than $5,500 to $7,500 in federal student loans, depending on their grade level, parents can borrow up to the full cost of attendance, minus any other aid. So, when student borrowing and other financial aid falls short of an institution’s posted sticker price, which routinely happens at high-priced universities, parents are left using Parent PLUS as a loan-of-last-resort to cover the remaining costs.

To qualify for the loans, parents with a qualified dependent child enrolled at least half-time in college must simply show that they don’t have an “adverse credit history” – a backward-looking measure that only means they have no egregious credit blemishes, such as bankruptcy or tax lien, within the previous five years.

The application is relatively simple – perhaps too simple, critics say. As part of the process of applying for federal student aid, parents can request a loan; it takes approximately 20 minutes through the Department of Education student loan portal, and the approved amount is tallied as part of the overall aid package offered. While they must also sign a Master Promissory Note, promising to repay the amount, some parents may not understand that they aren’t required to take on all of the loans offered, or that their children don’t have to help pay them back.

To add to the confusion, parents don’t know how much they’ll eventually owe since they only borrow for one year at a time. The cost of attendance will likely rise while their child is seeking a degree, and their child’s financial aid package may change from year to year. Unlike with student loans, Parent PLUS loans have no annual or lifetime borrowing limits, so taking on loans for four years – or more – of schooling can cause the debt to quickly rise.

The skyrocketing cost of college, rising faster than family incomes, combined with easy access to federal debt, has resulted in an overall increase in student loans taken out by parents: Between the 2001-2002 and 2016-2017 school years, the average size of Parent PLUS loans increased by 44 percent, according to data from the College Board. On average, parental borrowers now take on nearly $15,880 per year in Parent PLUS loans, which can swell to a principal amount of more than $60,000 by graduation (assuming a child finishes within four years). Nor does that debt come cheap: Loans taken in the 2017-2018 academic year are repaid at an above-market 7 percent interest rate, plus with a 4.3 percent loan origination fee.

That can ensnare even parents who, like Lynch and her husband, aren’t financial newbies. In addition to his job at Dyno Nobel, an explosives manufacturer, Lynch’s husband operates a sports bar, and he once worked as a mortgage broker. She works with her husband at the bar and teaches her three children about the importance of good credit, paying bills on time and responsible credit card use. Her children tapped financial aid and have found well-paying jobs, with one working as a nurse, another as an engineer and the youngest as a diesel mechanic.

But as she and her husband struggled to finance three college degrees, Lynch relied on quick and easy access to parent loans, despite the fact that they couldn’t repay them. A bout of unemployment and her husband’s on-the-job injury, which meant he was no longer earning a full salary, put them further in the hole. Lynch says she was thinking more about guiding her children through college than about how they’d repay the debt when it came due. “You’re worried about them getting involved in school and doing all their school stuff, and this is like thrown at you, like, ‘Oh you have to do a loan,'” she says. “And you don’t know any better. It’s really difficult to try to navigate what’s going on.”

Supporters of Parent PLUS loans argue that they serve an important function, making higher education attainable for low- and middle-income families who otherwise cannot pay tuition and living expenses. They extend better borrower protections, such as death and disability discharge, which private lenders aren’t required to offer. Plus, the post-graduation default rate for parents, at just 5.1 percent in 2010, the latest year available, is better than that for student defaults, which was nearly 15 percent for the same year, according to the DOE.

Yet at its worst, the Parent PLUS program is predatory lending, critics argue. The government charges high interest rates and bloated loan origination fees that low-income borrowers, who cannot tap home equity or successfully borrow on the private market, have no choice but to accept if they want their children to attend certain colleges and universities.

Plus, even though the government is indulgent when doling out money, it offers parents little wiggle room when they can’t repay. While students can take advantage of a slew of income-driven repayment programs to manage burdensome loans, those programs are largely closed to parents. Those who cannot afford their loan bills can easily tumble into default, triggering the garnishment of their Social Security checks, tax refunds and wages.

And this is no idle threat. Nearly 41,000 parent PLUS loan borrowers had checks garnished in 2015, according to the Government Accountability Office.

“[The Parent PLUS program] wasn’t purposefully created to be like a predatory lending program,” says Rachel Fishman, deputy director for research with the Education Policy program at New America, a District of Columbia-based think tank. “But for low-income families, it has become that. And the government can’t do anything about that without legislative change.”

Lynch had initially deferred repayment until after her kids graduated, in hopes that they would help pay down the debt she took on for their educations. But they have their own student debt and lives to finance. Now, she’s working to get on an affordable repayment plan.

“It was a means to an end,” she says. “I mean – I was looking at it – I couldn’t afford to pay for my kids’ college, and I looked at it like, ‘What is the alternative?'”

Editor’s Note: This story was produced in partnership with the McGraw Center for Business Journalism at the City University of New York Graduate School of Journalism. It is the first in a series of stories exploring the high cost and financial impact of federal student loan borrowing among the parents of college undergraduates.

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