If universities lack the ability and sophistication to better steer parents away from overwhelming parental debt, then perhaps the federal government and Department of Education can adopt that role. But instead the Feds ask parents – many of whom have never borrowed such large amounts outside of a mortgage or a car loan – to navigate a complex financial aid process. They must determine their own debt tolerance without knowing the full cost of a degree – and if they get it wrong, the government punishes them when they fail to repay. Protections that ease the burden on undergraduate student borrowers, such as loan limits, relatively easy access to income-based repayment and need-based subsidized interest, don’t exist for parent borrowers.
“The attitude is: ‘Oh, what did [the parents] think taking out $50,000 when they were going to retire in 10 years?'” says Persis Yu, a Boston-based staff attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “And it’s like, well, what they were thinking is that they want their kid to have a future.”
For years, lawmakers have talked about limiting parental borrowing, tightening credit requirements or even scrapping the Parent PLUS loan program completely, leaving borrowers to the private market. But those changes don’t address larger questions about college access and affordability, some experts say. Whatever their potential drawbacks, Parent PLUS loans may be the only option for many parents.
“You get into these philosophical arguments,” says Pamela Moran, a former Department of Education official and senior advisor for consumer advocacy at the Boston-based American Student Assistance. “If this is a federally based program that’s out there as perhaps a loan-of-last-resort for families that don’t have equity lines of credit, don’t have homes that they can borrow a second mortgage for, etc., this is their resource to help their undergraduate sons and daughters.”
For those who believe that college, even pricey private universities, should be available to students from all economic backgrounds, then Parent PLUS loans have a real reason to stay.
Whatever the potential benefits, Parent PLUS is still an imperfect program that can steer financially vulnerable families toward inappropriate amounts of high-interest debt. It enables parents, who may be ineligible to receive loans from any private lender, to tap heaps of federal money with little reflection. And the program abandons them when they struggle to repay that debt, which currently carries a 7 percent interest rate, leaving overstretched borrowers with few avenues for relief.
“The reason why PLUS loans have come into play is that there just isn’t enough financial aid to go around,” says Rachel Fishman, deputy director for research with the Education Policy program at New America. “Families are reliant on all sources of aid. Limiting that source of aid will either curb access or send families into the private market, where they’re going to get subprime loans.”
Attempts to restructure the program, including limiting access for high-risk borrowers, have been met with vocal backlash from universities and colleges. Limiting federal parental borrowing could strike a major blow to some low-endowment private schools, including the historically black colleges and universities, whose students rely on the availability of these funds.
A 2011 restructuring from the Department of Education made it harder for parents to pass the “adverse credit history” check and score approval for Parent PLUS loans. The resulting shift, which some experts say was bungled, resulted in a spike of Parent PLUS denials, with the proportion of credit-based loan denials increasing from 28 percent to 38 percent in one year, according to an article by Kevin Carey, vice president for education policy and knowledge management at New America, in The Chronicle of Higher Education. Colleges and other advocates fought back and managed to reverse some of the changes, which were so badly received that then-Education Secretary Arne Duncan apologized for the rollout. “I think we got to a reasonable place on the credit standards, but it was a very bumpy road getting there,” says Cheryl Smith, senior vice president of government affairs and public policy at UNCF, also known as the United Negro College Fund, which opposed the credit-tightening.
While conservative lawmakers have long looked to the program as a good candidate for privatization, one barrier is that the program earns the government billions of dollars every year, experts say.
Moreover, parental borrowing is often treated as a sideshow in discussions of student loan policy, not the main attraction. After all, students make up a larger percentage of the federal student loan portfolio than their parents do. There were about 10 times more undergraduate loan borrowers in the fourth quarter of 2017 than parent borrowers, according data from the National Student Loan Data System, and they borrowed hundreds of millions of dollars more in total. Their repayment woes draw more immediate concerns. Parents are often not even mentioned when politicians unveil student loan proposals or debate new policies.
But changes may be coming for parent borrowers.
In December, House Republicans gave consumers a peek at their student loan agenda with the release of plans for reauthorizing the Higher Education Act. The White House budget proposal, released this month, continued to call for similar changes. While the proposals outlined still have a long road ahead, they give parents and students a sense of where conservative legislative priorities lie.
One major push in the House bill is toward simplification. It would streamline multiple loan programs, including Stafford loans and PLUS loans, into a new Federal ONE loan program, with one option for undergraduates, another for graduate students and a third for parents.
The bill would also cap new parental loans at $12,500 per child per year, meaning that parents could no longer borrow up to the cost of attendance, minus any other aid. Currently, annual loans can run up to around $40,000 or more for students who receive little financial aid at the top-priced schools. Conversely, student borrowing maximums would be raised.
This cap could create a gap at some high-cost private schools that federal loans will not be able to fill, says Robert Kelchen, assistant professor of higher education at Seton Hall University.
“The ability to take on $75,000 in debt for one child would be gone,” Kelchen says.
Some parents may be able to fund that difference on the private market by applying for private student loans or tapping home equity. But for low-income families unable to qualify for private loans, certain high-priced institutions could become financially unattainable unless the schools increase the grant money available or the student scores generous private scholarships.
Will these changes make parental overborrowing a relic of the past or put downward pressure on college costs? Not necessarily, experts say. Capping parent loans still doesn’t get to the root of the college affordability problem, Fishman says. If it’s not done in tandem with an increase in student grant aid to meet the high cost of attendance, then parents will still be left holding the bag when it comes to college costs.
“Capping loans isn’t going to make college more affordable,” Fishman says.
For current borrowers and those in repayment, reauthorization of the Higher Education Act likely won’t make a difference on already-borrowed loans. Borrowers who took on student loans before 2019 would still be able to borrow through the current system until Oct. 1, 2024.
“Parents, in general, should continue to operate under the current system and the current rules,” says Tamara Hiler, senior policy advisor and higher education campaign manager for Third Way, a public policy and advocacy organization in the District of Columbia. “But I think this is a signal that there are changes on the horizon, that the status quo is insufficient moving forward.”
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 third in a series of stories exploring the high cost and financial impact of federal student loan borrowing among the parents of college undergraduates.