U.S. News & World Report. Jan 8, 2014.
A small change in the way the Department of Education approves parents for PLUS loans resulted in thousands of previously approved recipients being rejected the following applicable year, unable to help pay for their children's higher education.
In a report released Wednesday by the New America Foundation, policy analyst Rachel Fishman breaks down the effect the October 2011 change had on different Parent PLUS loan recipients, as well as on colleges and universities. Overall, Fishman found the department approved more than 200,000 fewer recipients in 2013 than it did in 2011.
The change came when the department tightened its requirement for credit check criteria. Before 2011, parents typically were approved if they didn't have an adverse credit history -- meaning no delinquencies of more than 90 days and no foreclosures, bankruptcies or defaults. But the department expanded its definition of what was more than 90 days delinquent to include debts that had been charged off or sent to collections.
"As a result, many families and higher education institutions were shocked to find that parents approved for the loan one year were suddenly denied the next," Fishman writes. "Students in the middle of their academic careers found themselves scrambling to cover a much larger portion of their bill upfront."
While the implementation of the change was poor, Fishman argues, the department's reasoning for making it was sound. Recognizing the fact that the government had made it too simple for lower- and middle-income families to over-borrow, the department attempted to remedy the situation.
Many families turn to PLUS loans after students max out on their own federal student loans. But unlike direct federal loans, PLUS loans have no cap, meaning parents can borrow up to the entire cost of attendance -- which includes not just tuition and fees, but also room and board, books and other expenses -- to help their children pay for expensive colleges they might not otherwise be able to attend.
"Since many colleges use Parent PLUS loans to fill the gap between what they charge and the federal, state, and institutional aid their students receive, parents turned toward these easily available loans to ensure their children could go to the college of their dreams," the report says.
That leniency allows for the possibility that low-income parents who get approved for the loans might take out more than they can repay. While the average cost of attendance can fall anywhere between $23,000 and about $44,000 per year depending on the type of institution a student attends, according to data from the Department of Education, a family making only $25,000 per year would struggle to repay a loan that large.
But the lack of a ceiling for PLUS loans is also an issue because they don't have the same benefits of other federal loans. In fact, they're more like private loans, New America Foundation senior policy analyst Ben Miller said in a panel discussion.
PLUS loans have higher interest rates, are not eligible for income-based repayment plans and are not dischargeable in bankruptcy, Miller said.
But since the policy change, some types of colleges and universities have been more affected than others. For-profits and historically black colleges and universities (HBCUs) -- which typically serve large numbers of low-income students -- were the hardest hit of all types of colleges.
Cheryl Smith, senior vice president for public policy and government affairs at the United Negro College Fund (UNCF), said during the panel discussion that PLUS loans are a "critical piece of the financing package" for low-income students.
Of all students attending HBCUs, Smith said, 74 percent are eligible for Pell Grants, which is an indication of financial need.
"Morehouse University, for example, was suddenly thrown into a financial crisis in 2012 after the PLUS credit changes," the report says. "Many freshmen who had paid their deposits suddenly could not afford Morehouse."
And because students suddenly couldn't afford those colleges, many schools saw drastic enrollment declines. Between 2011 and 2013, there were 54 percent fewer PLUS loan recipients at for-profit colleges and 45 percent fewer at HBCUs.
Fishman suggested several changes to improve the PLUS loan program, such as including an "ability to pay" metric in credit checks to ensure families don't over-borrow, putting a cap on PLUS loans, or doing away with the program entirely and increasing dependent student loan limits.
Still, Steve Gunderson, president and chief executive officer of the Association of Private Sector Colleges and Universities, said what "really bothers" him is an issue that transcends financial aid programs. Policymakers and institutions should direct their efforts toward making college affordable for low-income students, he said.
"I don't think we can or we should deal with PLUS in isolation," Gunderson said. "We've got a much bigger question here, and that is: How are we going to address the issue of access and affordability for low-income students in an era when 65 to 85 percent of all jobs require some level of postsecondary education?"
But Kevin Carey, director of the New America Foundation's Education Policy Program, said a topic educators and policymakers will likely return to is the increasing role of the federal government in the nation's higher education system.
"The larger context of this discussion is the ongoing and continually changing role of the federal government as the financier of our higher education system, and the implications of that relationship for all higher education institutions, but particularly those that serve students whose income circumstances make them eligible for financial aid," Carey said.